Stocks and the Dollar

On Tuesday, the S&P 500 recorded its third gain in a row with a rally of 0.9%. Although the breadth ratio was positive by a bit less than 3:1, the up/down volume ratio finished with a more anemic 5:4 positive margin. Among the 24 S&P industry groups, only nine outperformed the broad index, while 15 underperformed.

In our last post, we suggested that a rally much beyond 1010 – and especially through 1028-1029 – would weaken, if not eliminate, the potential for an impulsive decline. Since Tuesday’s high was 1026, the potential for a downside acceleration would seem to be diminishing. Put another way, the increased likelihood that this correction will prove to be a counter trend structure supports our view that it is a reaction within, but not a reversal of, the post-March bear market rally pattern.

The uptrends from both the March low and the July low are still intact, but a decline through increasingly important first support at 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. Below 980-970, support is indicated in the 954-934 range.

The recent high was important from a Fibonacci perspective. That said, we continue to use 1015-1040 as our resistance focal point.

US Dollar Index

Beyond stocks, there was a lot of talk about the dollar index’s 1.2% decline. The bottom line is that this decline, by itself, did nothing to our view that the index is close to a bottom. Intermediate momentum is oversold and improving. Moreover, Tuesday’s setback had no impact on the point and figure chart. So while Tuesday’s setback does allow for additional weakness (perhaps toward 75.89) as the larger post-March decline runs its course, we continue to view the weight of the evidence in a positive light. A rally back through 78.94 will do much to confirm a bottom.